Ch 12 - Partnerships
All of the following are characteristics of partnerships except:
a. Co-ownership of property.
b. Mutual agency.
c. Limited life.
d. Limited liability.
What is:
c. Limited life.
These are all the characteristics of a partnership:
1. Voluntary Association
2. Single Taxation
3. Mutual Agency
4. Limited Life
5. Unlimited Liability
6. Co-Ownership of Property
Explain the following stock features:
1. Participating
2. Nonparticipating
3. Cumulative
4. Noncumulative
What is:
1. Participating -Dividends may exceed a stated amount once common stockholders receive a dividend equal to the preferred stated rate.
2. Nonparticipating - Dividends are limited to a maximum amount each year. The maximum is usually the stated dividend rate.
3. Cumulative - Dividends in arrears must be paid before dividends may be paid on common stock.
4. Noncumulative - Undeclared dividends from current and prior years do not have to be paid in future years.
Name 1 advantage and 1 disadvantage of a bond
What is any of these advantages:
1. Bonds do not affect owner control
2. Interest on bonds is tax deductible
3. Bonds can increase return on equity
What is any of these disadvantages:
1. Bonds pay periodic interest
2. Bonds require repayment of par value at maturity
3. Bonds can decrease return on equity
At what points in holding a company's stock does one reach insignificant, significant, and controlling influence?
What is:
1. Insignificant Influence = <20% (short/long-term investments)
2. Significant Influence = 20-50% (equity method)
3. Controlling Influence = >50% (equity & consolidation method)
Explain the entries required on the following dividend dates:
1. Date of declaration
2. Record date
3. Date of distribution
What is:
1. Date of declaration - record liability for dividend (debit retained earnings, credit liability)
2. Record date - no entry required
3. Date of payment - record payment of cash to stockholders (debit liability, pay cash/issue stocks where applicable)
Under which of the following business organization forms do limited partners have little, if any, active role in the management of the business?
a. Limited liability partnership.
b. Limited partnership.
c. Limited liability companies.
d. None of the above.
What is:
b. Limited partnership.
All types explained:
Limited liability partnership:
Innocent partners not liable for other partner's malpractice/negligence
Limited partnership:
General partners (unlimited liability) & limited partners (limited liability)
Limited liability companies:
Partnership that combines the corporate benefit of limited liability for the owners with the benefits of single level partnership taxation
What are the differences between par value, stated value, and no par no stated value?
What is:
Par value - Arbitrary amounts assigned to each share of stock allowing for a de minimis book value; cannot be changed
Stated value - Arbitrary amounts assigned to each share of stock allowing for a de minimis book value; can be changed at each issuance
No par no stated value - Market value is used for all stock transactions
Explain the following bond features:
1. Secured
2. Unsecured
3. Convertible
4. Callable
5. Registered
6. Bearer
7. Term
8. Serial
9. Subordinated Debentures
10. Sinking Fund Bonds
What is:
1. Secured - backed by collateral
2. Unsecured - backed entirely on credit standing
3. Convertible - can be converted to stock
4. Callable - exercisable option to retire before maturity
5. Registered - bonds are issued in the names & addresses of their holders
6. Bearer - bonds payable to whoever physically holds them
7. Term - scheduled for maturity on one specified date
8. Serial - mature at more than one date (usually in series)
9. Subordinated Debentures - liabilities that are not repaid until more senior liabilities are settled
10. Sinking Fund Bonds - requires issuer to set aside assets over time to repay the bonds
1. Equity Securities
2. Debt Securities
What is:
1. Equity Securities - Reflects an owner relationship such as shares of stock issued by companies.
2. Debt Securities - Reflects a creditor relationship such as investments in notes, bonds, and certificates of deposit; They are issued by governments, companies, and individuals
What does a retained earnings deficit reduce?
What is:
Shareholder's equity
A partner accepting less payment than their capital is worth to withdraw from a partnership is considered a _______ to (remaining/withdrawing) partners.
What is:
bonus; remaining
* A bonus is reflected by a credit to the capital accounts of the partners receiving the bonus.
What rights are guaranteed to stockholders of a corporation?
What is:
1. Voting rights/electing board of directors
2. Dividend payments when declared
3. Sell or dispose of stock
4. Share in assets if liquidated
5. Preemptive rights
Explain the following:
1. Discount on bonds payable
2. Premium on bonds payable
What is:
1. Discount on bonds payable - contra-liability account (normal debit balance); occurs when contract rate of dividend is less than market rate, so bond is sold at less than par/face value.
2. Premium on bonds payable - adjunct-liability account (normal credit balance); occurs when contract rate of dividend is higher than market rate, so bond is sold at higher than par/face value
How does a company determine whether debt/equity securities are trading or available-for-sale?
What is:
Management's intent
What type of account is treasury stock?
What is:
Contra-equity account (equity account with a normal debit balance)
What is:
1. Gain/loss on liquidation is allocated to partners using their income-and-loss ratio
2. Liabilities are paid or settled
3. Any remaining cash is distributed to partners based on their capital balances (capital deficiency if debit balance)
How is the total value of common stock affected by a stock split?
What is:
Total value stays the same; # of shares and $ amount of par value stay in proportion
Explain the two types of leases:
1. Operating Leases
2. Capital Leases
1. Operating Leases - short-term (or cancelable) leases in which the lessor retains the risks and rewards of ownership
2. Capital Leases - long-term (or non-cancelable) leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee
What types of investments are recorded at fair value, and what accounts are involved?
Stock (if only stock is being held), trading securities, and available-for-sale securities are recorded at fair value.
The accounts involved are:
Fair value adjustment - Stock/Trading/AFS (pick 1)
Unrealized gain/loss (pick 1) - Income/OCI (pick 1)
Explain the reporting method for each of the following securities:
1. Held-to-maturity
2. Amortized cost
3. Trading
4. Significant influence
5. Controlling influence
What is:
1. Held-to-maturity - Amortized cost
2. Amortized cost - Fair value
3. Trading - Fair value
4. Significant influence - Equity method
5. Controlling influence - Consolidation
Which of the following statements is correct?
a. Salaries to partners and interest on partners' capital are
expenses of the partnership.
b. Salaries to partners are an expense of the partnership but
not interest on partners' capital.
c. Interest on partners' capital are expenses of the partnership
but not salaries to partners.
d. Neither salaries to partners nor interest on partners' capital
are expenses of the partnership.
What is:
d. Neither salaries to partners nor interest on partners' capital
are expenses of the partnership.
What does a company need in order to declare a dividend?
What is:
Sufficient retained earnings (always debited) and sufficient cash reserves (if paying a cash dividend)
This type of amortization allocates total bond interest expense over the bonds' life in a way that yields a constant rate of interest
What is:
Effective Interest Amortization
What types of investments can be in:
1. Short-term investments
2. Long-term investments
What is:
Short-term investments
- Held-to-maturity (debt) securities
- Trading (debt & equity) securities
- Available-for-sale (debt & equity) securities
Long-term investments
- Held-to-maturity (debt) securities
- Available-for-sale (debt & equity) securities
- Equity securities (significant & controlling influence)
What is the difference between small and large stock dividends?
What is:
Small stock dividends use market value for retained earnings reduction and par value for common stock with paid-in capital as the difference; large stock dividends use par value for retained earnings reduction and common stock with no room for paid-in capital.